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USD/CAD: Inflation showdown

Data released 1:30pm GMT

  • CAD CPI m/m

  • USD Retail Sales m/m

If Canadian inflation surpasses expectations, brace yourself for a captivating twist in the USD/CAD trade. Today, economists from Commerzbank are engrossed in discussions regarding the potential consequences of the impending inflation data on the Canadian dollar (CAD).

USD/CAD  forex currency and commodities price bar chart with green & red candles showing a trading trend over a daily time frame; indicators include moving average and Bollinger bands plus Relative strength indicator.
Daily Chart , technically it is a sell

While recent fluctuations in the USD/CAD exchange rate have been largely influenced by concerns surrounding the US debt ceiling, the forthcoming release of inflation data in Canada holds profound significance for the Loonie.

If the inflation rates align with consensus expectations or exhibit a slight dip, it is unlikely to substantially alter the rate expectations established by the Bank of Canada (BoC). Consequently, the impact on the Canadian dollar would be marginal. Market expectations derived from Overnight Index Swaps (OIS) indicate a low probability of further rate hikes and an anticipation of potential rate cuts by year-end.

On the contrary, should inflation surpass expectations and unveil an upward surprise, speculations may arise that the BoC could maintain interest rates at the current level of 4.5% for an extended period or potentially implement additional measures. Such a scenario could narrow the disparity between the expectations of the Federal Reserve (Fed) and the BoC, resulting in a positive effect on the Canadian dollar, particularly against its US counterpart (USD).

During Q1 2023, Canada witnessed a 5.6% annualized rise in its Consumer Price Index (CPI). Despite displaying initial resilience, the pace of deceleration gained momentum in recent months. Weakness is expected in March retail sales, following a surge in January. Similar to the US, Canadian consumers front-loaded their purchases, leading to a decline in February. Retail sales in Canada are projected to decline by approximately 0.4%-0.5%. The US dollar experienced a rebound against the Canadian dollar, reaching its highest point since April 28. Technical indicators suggest the possibility of a return to earlier highs. Despite a 1.30% decline, the Canadian dollar outperformed some major currencies, but it remains subdued without clear bullish signals. The focus of attention may not solely be on the Canadian dollar but also on the strength of the US dollar.

In the short term, upcoming data releases in both Canada and the US will wield significant influence over this currency pair, heightening the intrigue surrounding their interactions.

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